how do you become filthy rich?

Graduate School Business School - MBA
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<p>Well I am man of my word so here it is:</p>

<p>Take a look at CMG and CMG-b. What happened was that Chipotle was spun off by MCD. However, MCD created the b class shares in order to retain control as each B share has 10 votes compared to 1 for the A class. Currently, the spread between the two is $5.65 which is kind of absurd. Even factoring in carry costs of holding the trade for a year, it still nets >$4.00 if the two series do converge. </p>

<p>There is no requirement that the two will converge. However, pure economics tells us that the B shares should be worth at least as much as the A shares and logically should earn a premium as they hold 10x as many votes. Once the market recognizes this mispricing (and it already has...CMG has a 33% short interest which I believe is mostly arb related. It was a pain to find shares to short) this mispricing will close.</p>

<p>So there you go, current example of a market mispricing. Now, if you move into the realm of value plays which aren't so blatant you can find more candidates. So, I wouldn't write off his record as a function of luck alone.</p>

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<p>The key being "there is no requirement that the two will converge" and the fact that "once the market recognizes this..." is never guaranteed to happen. In fact, which one is mispriced? Maybe the market decides that CMG is currently overpriced, so the price converges (assuming it does) to the price of CMG B. Or maybe it happens the other way around. Maybe both CMG and CMG B are overpriced (or underpriced). So yeah, you found a pair of securities where one or both are probably mispriced. Picking what will happen after that and getting a consistent 100% YOY return is luck. Like I said, if you consider volatile small caps, tech companies and options to be staples of a low-risk personal investment portfolio, well...</p>

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<p>You don't ask people that post in online forums :)</p>

<p>The filthy rich tend to spend their time doing things that make them...filthy rich. I know a finance guy that left the midwest back in 98-99, did a gig with some firm in silicon valley that was bought out by Intel; guy had a good portion of ownership with said company and is probably worth 3-4 million at age 33. I suppose you could say he is 'filthy rich'; not because of his net worth, but because he was fairly well rounded and had a good personality and caring family. Which IMO would be infinitely more valuable than a small fortune.</p>

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<p>johnlennon> I am identifying a mispricing based on the relative value of the two stocks which track the same product. It doesn't matter which one of the two is overpriced or underpriced. I could care less about that. What matters is that the spread between the two is large and should not exist. Even if you factor in liquidity related premium, its still much too large for such a situation. When you identify situations like this, you trade the spread not the products. </p>

<p>When I say there is no requirement they will converge, I only mean that you can't convert A class shares to B class for example. However, this is an example of a market mispricing. If you can get the same underlying economic business as well as 9 additional votes, that share should be priced as much if not more than the other class. Its not that confusing, its actually common sense. As for "if the market will converge"....sooner or later it actually will converge. Markets are a competitive space, the spread will be decreased as more people realize the mispricing. Its already happening now...>30% short interest on CMG (you short the CMG and long CMG-b to trade the spread). That value is increasing everyday. Thats why I wished people luck in finding shares to short...I couldn't find that many. </p>

<p>A historical example of such a situation occured with 3Com and Palm. I know traders who made a killing in that deal. </p>

<p>As for options> You are buying into the notion that simply because they are options they are risky. That is an assumption beginners and people not involved in the market make. Options can be less risky (in terms of volatility, payouts, risk etc) than the underlying.
As for volatile small caps, here is the thing. I am guessing you are measuring risk to be the same as the volatility. Volatility is a direct function of leverage. If you crave volatility, you can crank up the leverage. I can make a 100MM market cap stock's "risk" equal to that of IBM just by varying volatility. That premise is false.
Secondly, what is risk? I don't buy the academic definition of risk as volatility when it comes to fundamental mispricing. Risk to me equals my maximum downside. If you have the market valuing the underlying business at 100MM when the business itself is worth 200MM, that is less risky than a company valued at 2billion by the market but worth 1 billion regardless of the standard deviation of the returns. This is the view taken by value investors and makes logical sense.
There are situations however where using volatility as proxy for risk is a good idea. I use it myself. For individual stock picking, however, it isn't wise. </p>

<p>Consistent 100% return per year is luck. However, there is the potential that an element of skill is involved as well. I am pointing out that you should not discount that.</p>

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<p>well...apart from stocks...id say a startup is a good idea...</p>

<p>an interesting read
<a href="http://paulgraham.com/wealth.html%5B/url%5D"&gt;http://paulgraham.com/wealth.html&lt;/a&gt;&lt;/p>

<p>and..
<a href="http://www.paulgraham.com/mit.html%5B/url%5D"&gt;http://www.paulgraham.com/mit.html&lt;/a&gt;&lt;/p>

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<p>mahras, I am not going to pretend that I'm some seasoned power trader, all my point in this thread was is that trading options and volatile small caps (or, options on volatile small caps) for 100% YOY returns is not considered a safe investing strategy, and those that choose to trade with the intent of huge YOY returns are the people that will cut their net worth by 75% when a bull market finally turns into a bear market. (not to mention, trading a spread in the fashion you mentioned will gain you a maximum return of, what, 8% or so? Not exactly on your way to those 100% gains we were discussing originally).</p>

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<p>I am talking about the CMG/CMG B spread ^</p>

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<p>yoy returns are meaningless right now. It is time to take advantage of chinese stocks that the chinese investors are helping run up and the overall bull market. BIDU expected earnings are up through the next year and earnings for the current quarter come out in a little over 2 weeks. RIMM, pure speculative play since many think that the iphone will garner more interest for other smart phones. Up 39% in two weeks after buying 350 BIDU shares and 300 RIMM and selling off FCSX. Hedge Funds being the exception, yearly earnings for funds can be considered luck. 1 yr, 3yr, 5yr, 10yr? Doesnt matter. Their is the great probability that they will have at least one year to counteract the poor performance in others. If you are not sophisticated enough or are risk adverse to investments during downturns Simply withdraw your money. Earnings like this are not unusual but will never be consistent. And as i see, the two securities listed are not microcap or any extremely volatile stock. Although BIDU has a P/E around 120, they still have a viable business proven by Google and expected earnings that are trending higher. And RIMM is not going anywhere soon. The data plans that accompany this kind of product are an important source of revenue for wireless providers. They need the continued service to make use of their new expansions and help fund further expansion</p>

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<p>JohnLennon> I agreed with you on that regard that those returns are not sustainable (unless you hit a lucky streak or have an informational advantage). Just saying that we shouldn't discount his entire track record as there might be some skill behind it. The spread was solely to show that equities have pockets of inefficiencies in them to another poster. </p>

<p>SouthPasdena> Don't get how chinese stocks and RIMM fit into this discussion on whether >100% yoy returns are sustainable or not or whether equity markets provide pockets of opportunities.</p>

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<p>take advantage of the moment. That was the point of the last post. I guess you could rephrase as pockets of opportunity. This is in response to john lennon</p>

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<p>Such a superficial goal, to become filthy rich. . .</p>

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<p>keep telling yourself that, if it helps you justify your own choices in life.</p>

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<p>"those that choose to trade with the intent of huge YOY returns are the people that will cut their net worth by 75% when a bull market finally turns into a bear market"</p>

<p>For stocks, probably. For options--not necessarily. Options trading is a zero sum game. Thus with options, every dollar won by someone is one that is lost by another, though this by no means implies the percentage of winners and losers is equal.</p>

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<p>Well yes but what JohnLennon means is that s/he is most likely to have made money being bullish which tends to create a bullish bias in a trader regardless of what market conditions are. He is also probably generating money by playing options directionally (in which case he is most likely playing +delta positions) which would hurt him if he kept the same bias but the broader market tanked. </p>

<p>For retail traders playing options, I would consider it a negative sum game due to the bid/ask spread that needs to be paid.</p>

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<p>Welll I'm not sure how many "retail" traders are playing regularly with options. The yokel who knows nothing about the market but makes millions is likely to have done it with stocks, not options, futures, or forex (all zero sum games in which timing is very important and which usually require more than a simplistic bullish/bearish bias to succeed in).</p>

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<p>I wasn't commenting about all market players, just retail traders. But you are wrong to think that only retail traders are price takers.
Most directional traders are price takers. Legally most entities can't make markets (HFs etc). They can set up independent entities but that requires a decent capital base and time commitment (its a different business) that most funds don't want to take.</p>

<p>There are plenty of "yokels" who know of options, futures, forex. They also offer a greater degree of leverage with which a piker can make a fortune (not due to skill but solely because if they won...they can win big). Timing is as important in equities as in forex and futures. In the same vein, it doesn't take more than a bullish/bearish bias to trade forex and futures. They are delta one products which make money solely through directional moves. The fact that they are zero sum games doesn't really change much (other than certain price characteristics...up and down moves in forex tend to be symmetrical while equities display sharper breaks). It can also be said that short term equities trading is a zero sum game. The best explanation and example I saw was in the book The Poker Face of Wall Street.</p>

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<p>Mahras, I wasn't commenting about price takers vs. price makers. </p>

<p>My point is this: A bear market is simply much more likely to wipe out those who tend to exclusively play w/equities, and these players are in fact much more likely to be retail than those that play w/ options, futures, and fx. This is not to say these other markets don't have pikers who are no doubt attacted by the greater leverage, but in general, my point stands.</p>

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<p>Get a high-paid job, spend like Scrooge, and invest your income. Most people will NOT become rich on their incomes alone. Most people will NOT become rich by the time they're 30. Sorry. But there's a lot of people in their early to mid 40's (or even late 30's) who are worth tens of millions.</p>

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<p>attend the university of phoenix</p>

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<p>I hear you, Mahras. According to Maboussin, the market aggregates all information from both short and long term players in such a way that equity prices reflect 12 month horizons. This in line with the high yearly turnover of most of the largest public mutual funds-they seek to maximize yoy returns as opposed to maximium return. I'm sure you've read the "equity risk premium puzzle."</p>

<p>Thus, a small player can, in my opinion-based on academic research, maximize their return by accepting greater volatility or beta on a yearly time line so as to maximize the multi-year return. Thus, low turnover is crucial, and looking for value where no short term catalyst exists for a fund manager to profit in the next 12 months will lead to realizing equities which have been afflicted by "hyperbolic discounting" in behavioral finance terms, i.e. the expectations of a few years out have been overly discounted because of a natural impulse to seek performance that will gratify fund holders in the next 12 months. The entire sell side research community is geared towards a 12 month price target paradigm.</p>

<p>On the other side, a shorter than 12 moth time line is useless for those not working with advanced algorithm trading and zero latency, priority trading. Wether or not stocks followed a random walk during Malkeil's time, they certaintly follow a random walk as far as the average retail investor is concerned. Some Arb potential does exist for the little guys where the big guys are too bloated to make any money, but often these trades are not even that profitable when taking into consideration margin costs, short term capital gains and transaction fees. </p>

<p>CMG and CMG-B is an arb that has been hyped for months in the blogosphere. When considering the cost of margin, this only proves my above point. By the time the spread closes, it doesn't matter that you "were right", in economic terms, your at a loss.</p>

<p>Also, I am a top ranked player on CAPS, and have been in the 99th percentile of all players everyday for over 6 months. Obviously, this is a few standard deviations out from what one would expect from randomness alone. However, this is partially because I'm not restricted to any market in my model porfolio, and can short at will, which is not always possible in the real world. Again, if my strategy faulters, a large loss wipes away all my hard work, as it's the geometric average that matters in the real world. Not enough traders look at low probability events.</p>

<p>Also, BIDU and RIMM are extremely overvalued. I'm gonna be pretty smug when BIDU inevitably repeats what the U.S. tech companies did in 2000.</p>